Friday, April 25, 2008

Strong Mac sales lead Apple earnings growth

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SAN FRANCISCO (MarketWatch) -- Apple Inc. shares bounced back from a weak start Thursday as investors got behind the company following its second-quarter report in which strong sales of Macintosh PCs helped drive Apple's earnings up 36% from a year ago.

Apple rose $6.05 a share or 3.7%, to close at $168.94 after the company reported earnings of $1.05 billion, or $1.16 a share, on $7.51 billion in revenue for the quarter ended March 31.

During the same period a year ago, Apple earned $770 million, or 87 cents a share, on sales of $5.26 billion.

The results topped Apple's forecast for a profit of 94 cents a share and $6.8 billion in revenue. Analysts surveyed by FactSet
Research had estimated Apple would earn $1.05 a share on sales of $7 billion.

The highlight of the quarter was 2.29 million Macintosh computers sold, a 51% increase over the past year's second quarter. Barry Jaruzelski, a managing partner with Booz, Allen, Hamilton, said the results show that the Mac is now the driving the Apple machine.

"The Mac is on a tear," Jaruzelski said. "The halo effect of the iPod has resulted in a broader product portfolio, and now the Mac can pull the boat along for a while."

While the Mac has picked up steam, iPod sales showed some signs of reaching the plateau that had long been anticipated. Apple said it sold 10.6 million iPods during the quarter, just a 1% rise from the same period a year ago.
Gross margins as a percentage of revenue were 32.9%, down from 35.1% a year ago.

"The revenue and unit (sales) were very strong," said Shaw Wu, of American Technology Research. "However, the margins were lighter than expected." Wu cut his rating on Apple's stock to hold from buy on Tuesday. Complete technology coverage.
Apple also said it sold 1.7 million iPhones during the quarter. Chief Operating Officer Tim Cook said, "We're confident in hitting the 10 million (sales target) for the year."

In recent weeks, questions were raised about iPhone shortages at Apple retail stores, with speculation rising that the company was working through its inventories in order to prepare for the release of a third-generation, or 3G iPhone.
However, Cook said he believed the main reason for the lower stock of iPhones was because, "there are more phones being bought there with the intention of unlocking (the phone), which remains a significant number."

The upbeat earnings report had been tempered somewhat by one of Apple's typically conservative third-quarter outlooks, which came in shy of Wall Street analysts' estimates.

For its fiscal third-quarter, Apple expects to earn $1 a share on revenue of $7.2 billion. Analysts had previously forecast Apple would earn $1.09 a share on $7.23 billion in sales.

But Apple has a history of lowering quarterly estimates and then turning in results that are higher than expected.
BMO Capital Markets analyst Keith Bachman said in a research note that for the past three years, Apple has given a fiscal third-quarter outlook for earnings that would be below its second-quarter results, and then exceeded both numbers.

For example, last year, Apple reported second-quarter earnings of 87 cents a share, then forecast a third quarter profit of 66 cents a share. Apple ended up earning 92 cents a share for the quarter.

Bachman holds an outperform rating on Apple's stock. He also raised his current fiscal year earnings estimate for Apple to $5.13 a share from $5.10 a share.

Prior to the earnings call, Apple said it had acquired P.A. Semi, a privately held chipmaker based in Santa Clara, Calif. which makes power-efficient chips that are mostly used in networking and telecom equipment.
Apple didn't disclose terms of the deal, but reports said Apple paid $278 million.

3G iPhone Presents Stealth Opportunities

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One of the first events to follow the debut of the Apple (AAPL) 3G iPhone, whenever that happens, will be the ritual ripping apart of the device by various analysts to figure out who is making the guts of the thing. Since no one had a 3G iPhone yet - heck, Apple has not even officially said there will be one - it would be a challenge to do a tear down just yet. But Craig Berger, of Friedman, Billings Ramsey, today took up the challenge.

Berger said some digging with supply chain sources finds that most of the component suppliers will be comparable those in the existing EDGE version of the phone. Here's a rundown on what he thinks will be found inside:

Broadcom (BRCM), he says, keeps the touch screen controller socket in the 3G iPhone and a potential iPod Touch refresh design. He also thinks the company could have a Bluetooth/WiFi combo chip in the next iPod Touch.

Marvell (MRVL), Berger says, likely keeps the 802.11 WiFi socket in the iPhone, but may have lost the WiFi socket in the Touch to the Broadcom combo chip mentioned above.

Infineon (IFX) and Samsung "remain overall device winners," he says. Berger says Infineon may be providing the 3G baseband chip, the RF transceiver, a power management chip. (The company supplies the EDGE baseband chip in the current iPhone.) Samsung is likely to provide the application processor, as it does in the current phone.

NXP and Texas Instruments (TXN) "also have peripheral smaller sockets in the 3G iPhone," he writes. ))
My take on all this:

First, this is all speculation, but isn't that what we do? We won't have a real life tear down until either a beta or the real deal's released. Based on what's in the current phone and the fact that AAPL will want to maximize manufacturing efficiency, the number of significant changes to the 3G iPhone will likely be kept to a minimum, though I think the 3G version may yet hold a surprise or two. Note the BRCM and MRVL commentary.

IFX: this stock is currently dirt cheap and, as speculated above, could be a big winner from a 3G iPhone. However, IFX has been weighed down by various items, not the least of which is continuing writedowns of its QI ownership, which got even uglier yesterday. However, even while IFX's book value is declining due to these writedowns, the stock is still trading below book and IFX just reaffirmed FY'08 EBIT. Given a revenue growth catalyst the shares may find a foothold after declining to multi-year lows recently and digesting the latest writedown from QI. The worst case is that IFX may be a value trap, but downside (after the latest writedown), should be limited. On any more weakness the risk reward profile looks pretty compelling here.

InterDigital (IDCC): While IDCC has been embroiled in patent disputes with Nokia (NOK), it doesn't seem to have these issues with AAPL, who's paying them for the current iPhone and AAPL signed a seven-year deal with IDCC related to the current and future versions of the iPhone. Based on IDCC's much stronger 3G portfolio, it's probably well positioned to generate even higher royalty fees from the 3G iPhone. As I mentioned previously, this name could be one of the best, if not the best, tertiary plays on the coming 3G iPhone. Note that IFX's 3G chips carry licenses from IDCC.

Logitech (LOGI): This company just reported overnight with another very solid quarter and cited various products that benefit from the AAPL food chain. Stock is cheap with solid growth, lots of cash and the company mentioned it's not seeing negative experience from the reported slowdown. In fact, it reported solid growth in its U.S. markets. Bottom line, if the 3G iPhone is the huge hit I think it will be then LOGI that will get some solid downstream sales.

BRCM: As mentioned above, it makes the chip that is key to making all that cool touchscreen technology happen. If BRCM wins even more slots that certainly doesn't hurt. One slot the analyst doesn't mention is for GPS. I would be surprised if a 3G iPhone doesn't include GPS and I think BRCM has better than a 2/3 shot at winning this as well.

Moreover, as I've speculated before, I think it's just a matter of time before we see AAPL incorporate its touchscreen technology into its Mac lineup, most likely starting with laptops. This would be a leap in the evolution of GUI (graphical user interface) related to computing, and after years of the mouse, we are due. This would be simply huge for AAPL and BRCM.

MRVL doesn't generate a lot of revenue from the iPhone. However, I thought that the iPhone might initially carry the core application processor from MRVL (based on Xscale purchased from Intel (INTC) ), instead of Samsung. As it turns out, I wasn't alone with this assessment.

Anyway, MRVL supplies this for Research in Motion (RIMM) and I'm still holding out hope that the die is not cast for Samsung. At this point it doesn't look like there's any expectation for MRVL to win this business, so if it did, MRVL could see a significant move higher.

Wednesday, April 16, 2008

IBM launches internal pilot program to test migration to Macs

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Long-time Microsoft Windows supporter IBM has recently initiated an internal pilot program to study the possibility of moving a significant number of its employees to Apple's Mac platform, leaked company documents show.

The documents, obtained by Roughly Drafted, underscore the growing interest in Macs among enterprise customers and reveal IBM to among the high-tech firms actively working to reduce their dependence upon the Windows operating system.

The first phase of the pilot program is said to have run from October 2007 through January 2008, in which 24 MacBook Pros were distributed to researchers at different sites within the company's research division.

In the documents obtained by Roughly Drafted, the former PC-maker outlined a series of reasons for evaluating Apple notebooks as a replacement for the Windows-based ThinkPads currently used inside the company.

Specifically, it said Macs are less prone to security issues, are widely used in the academic world with which IBM Research has close ties, and that many new company hires have said they're more comfortable with Macs and would like to use them as opposed to their ThinkPads.

During the initial pilot, participants were allowed to keep their ThinkPads, but were asked to use them only in the event that they needed to use software that was not yet available on the Mac. After the four month test period, the 14 research scientists, 8 software engineers, a director, and a VP staff assistant participating in the pilot program were asked to provide feedback.

Of the 22 of 24 who responded, Roughly Drafted reported that 18 said that the Mac offered a "better or best experience" compared to their existing computer, one rated it "equal or good," and three said the Mac offered a "worse experience." Seven reported having no or marginal prior knowledge of using Macs, while 15 said they had moderate or expert knowledge of the platform.

While all of the participants reported that it was easy to install IBM’s internal software on the Macs, several noted weakness or drawbacks associated with applications that were not yet suited for the Apple platform, or faced support issues. Among these were Microsoft's Visio diagraming and NetMeeting software, and several of IBM's own applications, such as its DB2 database and Websphere application server.

However, when asked if they would rather keep their MacBook Pro or return to using their familiar ThinkPad, only three chose the ThinkPad; the rest decided to keep the Mac notebook and obtain VMWare Fusion licenses to run Windows when necessary.

"I commend IBM on taking this bold step in providing an alternative to Windows," one employee said following the initial evaluation period. "It will definitely allow us to think different."

Said another: "I have been a true PC stalwart for 2+ decades, but after trying Vista, I’m ready for a change."

Following the success of the initial pilot, IBM reportedly plans to proceed with a second phase of the program that will see 50 employees equipped with Apple notebooks during the first half of 2008. Pending feedback, the company will then add an additional 50 to 100 users in the second half of the year.

According to Roughly Drafted, IBM's internal "Mac@IBM" website references an official group for Mac users within the company's walls comprised of over 930 members in 26 countries. It's described as "one of the largest and fastest growing communities within IBM."

Friday, April 11, 2008

Windows is 'collapsing,' Gartner analysts warn

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Windows is 'collapsing,' Gartner analysts warn
The researchers damn Windows in current form, urge radical changes
Gregg Keizer 11/04/2008 07:20:42

Calling the situation "untenable" and describing Windows as "collapsing," a pair of Gartner analysts this week said Microsoft must make radical changes to the operating system or risk becoming a has-been.

In a presentation at a Gartner-sponsored conference in Las Vegas, analysts Michael Silver and Neil MacDonald said Microsoft has not responded to the market, is overburdened by nearly two decades of legacy code and decisions and faces serious competition on a whole host of fronts that will make Windows moot unless the Redmond, Washington developer acts.

"For Microsoft, its ecosystem and its customers, the situation is untenable," said Silver and MacDonald in their prepared presentation, titled "Windows Is Collapsing: How What Comes Next Will Improve."

Among Microsoft's problems, the pair said, is Windows' rapidly-expanding code base, which makes it virtually impossible to quickly craft a new version with meaningful changes. That was proved by Vista, they said, when Microsoft -- frustrated by lack of progress during the five-year development effort on the new OS -- hit the "reset" button and dropped back to the more stable code of Windows Server 2003 as the foundation of Vista.

"This is a large part of the reason [why] Windows Vista delivered primarily incremental improvements," they said. In turn, that became one of the reasons why businesses pushed back Vista deployment plans. "Most users do not understand the benefits of Windows Vista or do not see Vista as being better enough than Windows XP to make incurring the cost and pain of migration worthwhile."

Other analysts, including those at rival Forrester Research, have pointed out the slow move toward Vista. Last month, Forrester said that by the end of 2007 only 6.3 percent of the 50,000 enterprise computer users it surveyed were working with Vista. What gains Vista made during its first year, added Forrester, appeared to be at the expense of Windows 2000; Windows XP's share hardly budged.

The monolithic nature of Windows -- although Microsoft talks about Vista's modularity, Silver and MacDonald said it doesn't go nearly far enough -- not only makes it tough to deliver a worthwhile upgrade, but threatens Microsoft in the mid- and long-term.

Users want a smaller Windows that can run on low-priced -- and low-powered -- hardware, and increasingly, users work with "OS-agnostic applications," the two analysts said in their presentation. It takes too long for Microsoft to build the next version, the company's being beaten by others in the innovation arena and in the future -- perhaps as soon as the next three years -- it's going to have trouble competing with Web applications and small, specialized devices.

"Apple introduced its iPhone running OS X, but Microsoft requires a different product on handhelds because Windows Vista is too large, which makes application development, support and the user experience all more difficult," said Silver and MacDonald.

"Windows as we know it must be replaced," they said in their presentation.

Their advice to Microsoft took several forms, but one road they urged the software giant to take was virtualization. "We envision a very modular and virtualized world," said the researchers, who spelled out a future where virtualization -- specifically a hypervisor -- is standard on client as well as server versions of Windows.

"An OS, in this case Windows, will ride atop the hypervisor, but it will be much thinner, smaller and modular than it is today. Even the Win32 API set should be a module that can be deployed to maintain support for traditional Windows applications on some devices, but other[s] may not have that module installed."

Backward compatibility with older, so-called "legacy" applications, should also be supported via virtualization. "Backward compatibility is a losing proposition for Microsoft; while it keeps people locked into Windows, it also often keeps them from upgrading," said the analysts. "[But] using built-in virtualization, compatibility modules could be layered atop Win32, or not, as needed."

Silver and MacDonald also called on Microsoft to make it easier to move to newer versions of Windows, re-think how the company licenses Windows and come up with a truly modular operating system that can grow or shrink as needed.

Microsoft has taken some new steps with Windows, although they don't necessarily match what the Gartner analysts recommended. For instance, the company recently granted Windows XP Home a reprieve from its June 30 OEM cut-off, saying it would let computer makers install the older, smaller operating system on ultra-cheap laptops through the middle of 2010.

It will also add a hypervisor to Windows -- albeit the server version -- in August, and there are signs that it will launch Windows 7, the follow-on to Vista, late next year rather than early 2010.

Apple's OS Edge Is a Threat to Microsoft

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A recent upgrade to the Mac operating system moves Apple closer to challenging Microsoft for overall computing dominance, even in the corporate market

by Gary Morgenthaler

The 20-year death grip that Microsoft has held on the core of computing is finally weakening—pried loose with just two fingers. With one finger you press "Control" and with the other you press "right arrow." Instantly you switch from a Macintosh operating system (OS) to a Microsoft Windows OS. Then, with another two-finger press, you switch back again. So as you edit family pictures, you might use Mac's iPhoto. And when you want to access your corporate e-mail, you can switch back instantly to Microsoft Exchange.

This easy toggling on an Apple computer, enabled by a feature called Spaces, was but an interesting side note to last fall's upgrade of the Mac OS. But coupled with other recent developments, the stars are aligning in a very intriguing pattern. Apple's (AAPL) recent release of a tool kit for programmers to write applications for the iPhone will be followed by the June launch of iPhone 2.0, a software upgrade geared toward business users.

Taken together, these seemingly unrelated moves are taking the outline of a full-fledged strategy. Windows users, in the very near future, will be free to switch to Apple computers and mobile devices, drawn by a widening array of Mac software, without suffering the pain of giving up critical Windows-based applications right away. The easy virtualization of two radically different operating systems on a single desktop paves a classic migration path. Business users will be tempted. Apple is positioning itself to challenge Microsoft for overall computing dominance—even in the corporate realm.

Such an idea rarely finds expression in public. Apple today is a "consumer-products company." Each new Apple product unveiled—from iPod to iPhone—comes with the excitement and glamour of Steve Jobs' "reality distortion field." Yet if you look at the larger picture, broader battle lines are forming. It's as if Jobs were a general from the 19th century, quietly massing troops out of view and under cover of trees. Mere "features" like Spaces look increasingly "strategic." On present course, an Apple assault on Microsoft's (MSFT) seemingly impregnable enterprise monopoly now appears quite possible by 2010.

It all started with Mac OS X, the multi-core, multi-processor platform officially released in 2001. Based on "Mach," a university UNIX research prototype, Mac OS X represented a clean break with the computer industry's uniprocessor past. The modular new OS allowed Apple to condense its core task management function into a tiny computing kernel.

That kernel has proved easily adaptable across the entire Apple product line, from highly complex servers all the way down to the relatively simple iPod Touch. Such modularity allows Apple to add whatever functions are necessary for each product environment—all while maintaining cross-product compatibility.

By contrast, Microsoft has held on to an OS tethered to the 1980s, piling additions upon additions with each upgrade to Windows. With last year's arrival of Vista, Windows has swollen to 1 billion bytes (a gigabyte) or more of software code. The "Mach" kernel of the Mac OS X, however, requires less than 1 million bytes (a megabyte) of data in its smallest configuration, expanding modestly with the sophistication of the application.

This bloating has saddled Vista users with increased costs and poor performance on average computers. Bloating has also led Microsoft to fragment its OS product line: one OS for the server, desktop, and laptop; one for cell phones and Zune music players; and a separate OS for its Xbox gaming console. Finally, through sheer complexity, bloating makes every subsequent "enhancement" of Windows buggier than the last. Thus, the current Vista product fiasco (, 1/23/08).

The contrast between Microsoft's and Apple's product development strategies couldn't be starker. Where Microsoft is increasingly hamstrung by OS rigidities, Apple moves flexibly and swiftly. While Microsoft struggles to bring a kernel-based "Windows 7" to market in 2010, Steve Jobs has declared Mac OS X the right platform for the next decade of new products. Engineering improvements in one Apple product quickly find use at low cost in another. While Apple's "multi-touch" screen innovation made its debut with the iPhone, it appeared on the MacBook within 60 days. With this sort of flexibility, Apple is ever-free to target existing markets or invent whole new ones.

Given these advantages, how might an Apple assault on the corporate market play out?

• Despite Apple's relative scarcity on corporate desktops, Mac laptops are already well accepted within the enterprise, with a market share of more than 20% and growing. For business travelers, the new MacBook Air, some three pounds lighter than comparable Windows-based laptops, already offers one huge advantage. And now, with the ability to jump back and forth between Mac and Windows applications, more corporate users are bound to embrace Mac laptops.

• While Mac desktops offer a growing number of superior features over Windows desktops, it's still not enough to persuade corporate IT departments to make a switch. So for now, Apple will merely strive to hold the line on its current share of the business desktop market and apply greater marketing pressure elsewhere.

• Apple's recently introduced Leopard servers compete in a market of unhappy Vista server buyers where Microsoft's market share is only 40%. Leopard has a decent chance to expand from its small beachhead.

• Surprisingly, it's the 4.8-ounce iPhone that will sweep Apple decisively back into the enterprise. Even without any enterprise applications, the iPhone has seduced business users with the prospect of easy listening (iTunes), easy surfing (Safari), and easy compatability with a Mac computer. And with the impending business push, the device will soon provide corporate e-mail access and perform serious computing tasks such as setting calendars, checking inventory, figuring prices, and taking orders on the spot.

As corporations become increasingly mobile, the pressure will build to make them Apple-centric from top to bottom. Rising sales of Apple laptops and iPhones will make the Mac OS only that much more mainstream and acceptable to corporate IT departments. By 2010, the number of iPhones in use could approach 100 million. It's possible that the iPhone's share of the U.S. smartphone market (28% in the fourth quarter) will soon approach the 70% share iPod now holds in the MP3 market.

The final piece to this puzzle would be the rebirth of the Apple applications development ecosystem. The new Software Development Kit (SDK) for the iPhone not only allows independent developers to create new applications for that device but also brings them back to the Macintosh platform. That means any program written for the iPhone can be easily adapted into a Mac computer version as well. The response has been huge: More than 100,000 developers downloaded the SDK in the first week of its availability. And iPhone's popularity for mobile business applications can only grow. (Put Vista on a cell phone? I don't think so.)

So, the battle ahead seems clear: It's Apple's seamlessly integrated software strategy, minimally sized and maximally efficient, competing against Microsoft's strategy of multiple incompatible, bloated, and fragmented operating systems. It's Apple's growing customer acceptance vs. Microsoft's rising customer pain. By failing to modernize its operating system in a timely way, Microsoft has left its flank wide open for an all-out assault from a once-vanquished rival.